Airbus in the hot seat at air show

Originally published July 12, 2014 at 8:00 pm
Updated July 15, 2014 at 10:16 am

Boeing 777 jetliners, in various stages of completion, are seen on the factory floor in Everett.

John Wojick, head of sales at Boeing Commercial Airplanes, says Airbus “will have to make some big investments” to strengthen its lineup.

This image released by the U.S. Navy shows the F-35 Joint Strike Fighter Lightning II, built by Lockheed Martin, taking off for its first flight December 15, 2006 to test the aircraft’s initial capability from the Joint Reserve Base at Fort Worth, Texas. The Norwegian government chose the Joint Strike Fighter to replace its aging fleet of jetfighters against the Swedish Gripen, for an amount of several billions of Euros, disclosed on November 20, 2008.

When the Farnborough Air Show opens Monday outside London, the pressure will be on Airbus executives, who face a stack of big strategic questions about how they’ll revamp their widebody-jet lineup.

Such high-stakes decisions are frequently angst-ridden. In 2011, Boeing stumbled into the launch of the 737 MAX, its updated narrowbody, then dithered for more than a year before launching its 777X last fall.

At Farnborough, “the eyes of the aviation world are on Airbus,” said Richard Aboulafia, longtime aerospace analyst with the Teal Group. “There isn’t the same level of existential dilemma for Boeing at this Air Show.”

That’s the way John Wojick, head of sales at Boeing Commercial Airplanes, sees it too.

Once Boeing launched the 777X in Dubai last November, Wojick’s widebody-jet strategy was set. Boeing now has a clear plan to execute: Ramp up production of 787 Dreamliners and deliver the 777X on time.

Airbus, in contrast, is still pondering how to fill gaps at the larger and smaller ends of its lineup.

In a preshow interview, Wojick said Airbus “will have to make some big investments” to fill those holes and to answer the questions the aviation world is now asking:

Will Airbus launch a new version of the A330 mid-size twinjet with new fuel-efficient engines to compete against Boeing’s 787?

At the larger end of the twinjet market, what can Airbus do to compete against Boeing’s 777X?

And what must it do to keep its flagging A380 superjumbo jet program viable?

The answer to the first question looks nearly certain — Airbus may even launch the A330neo at Farnborough.

The entire aviation industry will look for clues at the Air Show to Airbus’ other possible moves.

“This is a chess game,” Wojick said. “They are a very fierce competitor. They will continue to invest.”

Washington delegation

The Farnborough Air Show alternates annually with the Paris Air Show as the pre-eminent event on the aerospace calendar, a place to assess the current state of the aviation business and the continuing rivalry between Airbus and Boeing.

One cloud in Boeing’s sky is certain to be a hot topic inside the private chalets at Farnborough: the possibility that Congress may kill the U.S. Export-Import Bank, cutting an important source of backstop funding for its jet sales.

Otherwise, Boeing can be satisfied with a steady-at-the-helm message at Farnborough.

It may firm up more of the massive 777X orders announced in Dubai. And at the daily flying displays it will showcase one of its new Dreamliner models, the 787-9 — the first of which was freshly delivered to Air New Zealand just before the show.

The jet-maker is expected to dismiss recent fears that orders could melt away, and to reiterate aggressive plans to ramp up production rates, keeping its Puget Sound area plants on track to churn out airplanes as never before.

Washington state’s aerospace sector will be represented at Farnborough by a 40-strong delegation of industry executives and local government officials.

On Sunday, the eve of the show, Gov. Jay Inslee hosts the Washington state reception at a glitzy venue: the just-opened Shangri-La Hotel, on the 34th floor of the Shard, one of London’s newly iconic modernist skyscrapers.

Inslee and the state delegates will spend much of the Air Show in meetings with executives of aerospace companies, especially suppliers to Boeing who may want to locate some operations in Washington to win 777X work.

On Monday, Inslee will announce a boost to Washington state’s aerospace sector, bringing around 80 jobs.

Alex Pietsch, director of Inslee’s aerospace office, said many other deals are in play, though they likely won’t have an outcome until later.

Beyond the networking, Farnborough is also showtime for the latest hardware in the airplane world.

In the daily flying displays, the biggest attraction should be the Air Show debut of Lockheed Martin’s F-35 Joint Strike Fighter, assuming the Pentagon gives the all clear. An engine fire last month temporarily grounded the entire F-35 fleet.

Airbus will fly its new A350, still in flight test and due for first delivery by year-end; its superjumbo A380; and its A400M military-cargo turboprop.

Boeing will fly the 787-9 as well as its P-8A Poseidon anti-submarine jet — a military version of the 737 that’s built in Renton and fitted with weapon and sensor systems in Seattle.

Booming orders?

Boeing goes into the show well ahead of its rival in this year’s jet sales. Airbus has 290 net orders against Boeing’s 649 net orders, including the massive Emirates order for 150 widebody 777Xs finalized just days ahead of Farnborough.

But while Boeing clearly doesn’t reserve sales announcements for Air Show news conferences, Airbus sales chief John Leahy always strives for a big splash. So expect more balance in the sales tallies to be restored by the end of this week.

Whatever orders are touted, both plane-makers must address growing concern about the solidity of previous orders that now form a seven- or eight-year backlog of production.

This month, both German flag carrier Lufthansa and Air France warned of excess seat capacity on their routes due primarily to the influx of large jets deployed by the giant Arabian Gulf carriers that have led the boom or record orders.

Yet Boeing’s new 20-year forecast, presented in London on Thursday, raised its projection for aircraft demand by more than 4 percent from last year.

If there’s one thing Boeing and Airbus agree on, it’s that no order bubble is about to burst and ruin the all-time-high production plans.

Barry Eccleston, chief executive of Airbus Americas, is as insistent as Boeing’s Wojick that the aviation business’s phenomenal growth is fueled not only by expansion in emerging markets but also by the need of many carriers to replace aging jets.

“The replacement cycle in the U.S. is gigantic,” Eccleston said in a preshow interview.

Both manufacturers point to their geographically diversified order books and argue that even if some orders are canceled in a regional economic downturn, they can swap in orders from somewhere else to maintain production rates.

“Having eight years of backlog is a tremendous strength to manage your way through a down cycle,” Eccleston said.

A330neo launch?

Airbus is building airplanes at record rates and has been executing its new programs brilliantly.

After initial delays of some 18 months, the A350, while still challenging, has managed to stay on track for the past two years.

And the European jet-maker just rolled out its first narrowbody A320neo, at least a year ahead of Boeing’s 737 MAX.

Still, nagging strategic decisions loom.

Eccleston is bullish on the option to launch an A330neo.

“There is a lot of pressure from the airlines to do this” to address the market for small, twin-aisle jets, he said.

An A330 with a new engine would deliver a 12 percent improvement in fuel efficiency and could be available for service by early 2018, he said.

However, Eccleston said Airbus is still in discussions with airlines. Launching the jet this week at Farnborough would be “very aggressive,” he said.

Airbus must do something soon, however, because the current A330 isn’t competitive on fuel efficiency with the 787. Its sales will likely fade unless the jet is updated. The company’s new A350, meanwhile, is too large to compete directly with the 787-8.

Aboulafia, the analyst, said the A330neo decision is “not a difficult choice” for Airbus. “They can lose the entire 200- to 300-seat market, or they can do it.”

He sees an A330neo as “a really great machine” for trans-Atlantic or intra-Asia routes, where the much longer range of the 787 is not needed.

And though an A330 with a new technology engine still won’t be able to match the all-new 787 on fuel efficiency, it could get close enough that Airbus can make up the difference on the selling price.

The other big widebody decisions facing Airbus are more difficult to address.

The one most vital to Boeing is what Airbus will do to match the new 777X, which features a giant wing built of advanced composites.

Airbus has in development the A350-1000, which at just over 350 seats is about the same size as the planned 777-8X.

But against the bigger 777-9X, seating more than 400 passengers, Airbus has nothing.

Can it stretch the A350 even more to match the -9X?

A response to 777X

Adam Pilarski, longtime industry analyst with consulting firm Avitas, said this is a complex decision, requiring close collaboration with A350-1000 engine-supplier Rolls-Royce.

Yet he warns against thinking that Airbus is at a disadvantage. Rather, he says, Airbus is simply at a different phase of the strategic process.

After all, though Boeing’s 737 MAX decision came eight months after Airbus launched its rival A320neo, the MAX is a huge success.

And a year ago, Boeing hadn’t decided on how to respond to the A350 and protect its valuable 777 franchise.

Boeing finally came up with the 777X. Despite the appearance of dithering that proved a stellar move. Now it’s Airbus’ turn, Pilarski said.

Still, an even bigger A350 would be costly and Airbus might struggle to do that and an A330neo at the same time.

“In the end, they have to do both,” said Aboulafia. “It’ll be a while before they have the resources.”

Airbus’ Eccleston insists there isn’t any urgency to match 777X.

“We’ll get around to it eventually,” he said. “It’s certainly not near the top of our priorities.”

Higher up that list, he suggests, is a revamp of the A380 superjumbo, which has sold poorly except for purchases by a single carrier, Emirates.

“Our next project, which is not yet, is to find a way to put more seats into the A380,” Eccleston said.

Some airlines are calling on Airbus to either stretch the jet so that it’s even more massive — able to carry more than 600 passengers — or to put new engines on it, or both.

Alternatively, there is talk of an altogether cheaper option: packing in more people by narrowing the seats and making the cabin 11-abreast.

Some analysts, including Aboulafia, believe further substantial investment in the A380 would be money poured down the drain.

Boeing clearly thinks so.

Its new annual forecast shrinks the market for very large aircraft — meaning the 747 and the Airbus A380 — to just over 600 airplanes over the next two decades.

“Re-engining the A380 isn’t going to make any difference,” said Boeing vice president of marketing Randy Tinseth.

The 777X is well on its way to market success.

In addition to the freshly firmed up Emirates order, Boeing could announce at Farnborough the finalizing of another big order of 50 from Qatar Airways.

So if Airbus truly decides that a response to the 777-9X is a later priority, Boeing will be content.

Ex-Im Bank anxiety

Going into the Air Show, Boeing’s most unsettling problem is essentially a Washington, D.C., concern: whether Congress will reauthorize the Export-Import Bank. Yet executives may find political leverage at Farnborough.

Current authorization for Ex-Im — which promotes U.S. exports by providing loans or loan guarantees to foreign companies so they can purchase U.S. goods — is set to expire in September and congressional Republicans are balking at renewal.

In the past five years, the bank has provided $40 billion worth of loans or loan guarantees to Boeing customers.

Wojick said the key issue is not the slightly lower interest rates that airlines might get when financing is guaranteed by the U.S. government.

Instead, he said, it’s the certainty the bank provides that, even if there is some external shock to the airline business or some unforeseen economic downturn, backstop financing will be there when deliveries come due five or six years out.

The airplane sector has gone through such difficulties before, most recently during the global-financial meltdown of 2008.

Ex-Im stepped up then, ensuring that airplane financing was available and hence that airplane manufacturing continued unabated.

At Farnborough, Boeing executives will likely make their case for the Ex-Im Bank in private discussions with the U.S. politicians attending, including many Republicans from southern states that have significant aerospace manufacturing.

Meanwhile, Wojick said, the political uncertainty is already having a negative impact in his sales campaigns.

“Our competitors are using it against us right now with our customers as a competitive weapon and a reason not to do business with the Boeing Company,” Wojick said.